Why 2014 Should Be Another Great Year for Stocks

Feb. 6, 2014

By Dave S. Gilreath, CFP®

Fireworks go off at midnight on New Year's Eve in Times Square in New York Jan. 1, 2014.

Carlo Allegri/Reuters Photo

After the U.S. stock market’s strong performance in 2013, the question on everyone’s mind is: Will the pendulum swing back this year? In January, the Dow Jones Industrial average tumbled 5 percent, and the first part of February hasn’t been kind to stocks either. A rocky start to the year has prompted pessimists to wonder what other hammerings might be in store this year.

So it’s probably unfashionable to say this, especially after the market meltdown of 2008–09, but I expect 2013’s rise to continue. I believe the Dow will hit 20,000 by 2015 — and possibly this year. With the Dow having risen about 27 percent in 2013 (the greatest one-year increase in 18 years), many people might dismiss this rosy projection as being right out of Never Never Land. But a strong case can be made for it. If current economic conditions and history is any guide, the market is likely to continue upward into 2015, contrary to doom-saying by those reacting with knee-jerk fear to January and more recent down days.

The case for a robust 2014-2015 includes these points:

• Strong corporate gross profit margins of 29 percent drove robust earnings last year, and margins are forecast to be up even more in 2014, to more than 34 percent. Gross margin is simply a measure of profitability--the higher this figure, the more a company adds to its bottom line with each dollar of sales. In 2014, all signs are that margins will be strong and with them, new investment.

• Economy rising. One reason for healthy margin and earnings is the lighter load that many companies are carrying now that they have macroeconomic winds at their back. During and after the Great Recession, these companies were able to throw a lot of garbage off their corporate buses. Now they’re leaner and meaner as a result, and better able to profit from rising consumer confidence that will prompt large companies to part with some of their trillions in cash reserves, thus stimulating the economy and purchasing.

Consumers, who are reversing their recessionary mentality that they would have to eat gruel for a decade, continue to go to work every day. And though many of them may not have had a raise in years, they no longer see a hangman’s layoff noose every time they walk past HR. Also, they once again are experiencing the wealth effect because their homes are again rising in value. So more are breaking down and buying that new car they’ve been postponing.

• Rising employment will continue. Technological innovation won’t just eliminate jobs; the productivity it generates will seed new jobs in various economic sectors. Sustained earnings will spur share-price growth. That, plus the current doldrums in bonds, will speed the reversal of the Great Rotation from stocks to bonds and alternative investments (made fashionable by big university endowments, which were widely imitated).